The numbers
Profitability: knowing whether the business can afford to grow
The four metrics that decide whether it pays to invest more, the rule that tells you if you can scale, and how each one is calculated.
5 min read4 partsFree
01The question to answer before spending
Before putting one more peso into ads, there is a question almost nobody asks: can this business handle scaling?
It sounds obvious and it isn't. A business can sell well every month and still be structurally broken: if bringing in a customer costs almost as much as that customer leaves you, every extra peso of advertising speeds up the loss instead of the growth.
You won't see it in this week's sales or in this month's ROAS. You see it in four numbers, looked at over six to twelve months.
02The four basics, and how to calculate each one
They are called basics because everything else rests on them. Each one is calculated with data you already have, even if you aren't looking at it.
| Metric | What it is | How to calculate it |
|---|---|---|
| CPA | What it costs to bring in a NEW customer | Money spent on ads ÷ new customers in the period |
| LTV | What that customer leaves you in 12 months | Total revenue ÷ unique customers, over a year |
| Frequency | How many times a year they buy | Number of purchases ÷ unique customers |
| Repurchase | What % comes back at least once | Customers with 2+ purchases ÷ total customers × 100 |
Do
- Use NEW customers for the CPA, not all sales. If you divide by total sales, the number will look much better than it is and you will scale on a lie.
- Measure LTV over twelve months. Anything shorter cuts off half of your repeat customers.
- If you are just starting and don't have a year yet, use what you have and note that it's provisional.
Avoid
- Looking at the CPA in pesos and comparing it with last month's. With inflation, the same CPA means different things every six months.
- Calculating LTV with the average ticket and calling it a day. The ticket is one purchase; LTV is all of them.
03The rule that decides whether you can scale
Bringing in a customer has to cost at least three times less than what that customer leaves you in a year. That's the LTV to CPA ratio, and it's the only one you can compare across countries, currencies and semesters, because it's a proportion, not an amount.
If the CPA gets close to the LTV, investing more won't fix it. Investing more there only makes you lose money faster.
| LTV ÷ CPA | What it means | What to do |
|---|---|---|
| Under 2 | Each customer barely pays back what it cost to bring them in | Don't scale. Fix margin or retention first |
| 2 to 3 | On the edge. One bad month turns it around | Scale slowly, watching closely |
| 3 to 5 | Healthy | You can scale with confidence |
| Over 5 | Very good, or you're investing too little | You can probably spend more than you do |
Do
- Healthy example: CPA $1,000, LTV $4,000. The cost is 25% of the value and there's room to grow.
- Broken example: CPA $2,500, LTV $3,000. The cost is 83%. You don't scale that; you fix the basics.
- If the ratio is weak, look at repurchase first: raising it moves LTV without touching the ads.
Avoid
- Raising the budget hoping the ratio improves on its own. It gets worse: the cheap audience runs out and the CPA goes up.
- Comparing your ratio with a business in another category. A durable good and a consumable play a different sport.
04Repeat consumption versus durable goods
There's a structural difference between categories that decides much of the result, and it's decided before you open the business.
A category where customers come back every month has much better economics than one of durable goods. Nobody buys two fridges. A durable-goods business lives on finding new customers forever, which means the acquisition cost never stops running.
If you are already in a durable category, the lever isn't retention: you won't have it. It's margin, ticket size and complementary products.
Repeat consumption
- Customers come back on their own if they liked it
- LTV grows over time
- Retention is the main lever
- You can afford to pay more for a new customer
Durable goods
- Every sale is a new customer
- LTV is close to the ticket of a single purchase
- The levers are margin and ticket
- The CPA has to be low, no matter what
Case
Supplement store, 8 products
It sells well and wants to double its ad budget. Before spending, it wants to know if it pays off.
- It gathers the last 12 months: it spent $600,000 on ads and brought in 150 NEW customers. The CPA is $4,000.
- It checks how much each customer left in the year: $16,000 on average, because 40% buy again.
- The ratio is 4 to 1: each customer leaves four times what it cost to bring them in. That's in the healthy range.
- Before raising the budget, it checks the website's conversion: it's at 0.7%. Taking it to 1.4% would double sales with the same spend.
It can scale, and on top of that it finds that the cheapest lever wasn't the budget but the page. In SYB that ratio is calculated automatically from the sales you log, and the dashboard warns you when it drops below 3.